Content Monetization Models – Micro-transactions vs. Subscriptions

Digital businesses are booming with plethora of business models to choose from. Deciding on the the right business model for content monetization means accelerating the path of success offering unique value to your customers and steady revenue.

A solid business model not only is a guarantee that your business will survive possible downturns, but it is also a long term solution if your have digital assets you want to monetize.

Picking the right business model or other recurring revenue model for your business depends on your product or service, industry and customer demographics.

Content monetization, in particular, revolves around two business models: Subscriptions and Micro-transactions. These models have their pros and cons, however, they also share commonalities.

We are going to look at the key terms of these two business models, divided into 2 separate blog posts as well as the metrics associated with each, so you can easily decide which one is a better option for your content monetization business.

Micro-transaction business model

Micro-transactions are in-game purchases that unlock specific features or gives the user special abilities, characters or opportunity to purchase content or services. The purchases are virtual allowing the customer to make transactions that can range from $0.99 to $99 (possibly even more) thus making content monetization possible for the publisher.

This business model originates from Asia when in 2005 gained prominence after being adopted by online gaming and service providers. It can also be used for events that are streamed online.

Nowadays, although Asia still remains no.1 region for the micro-transactions business model it has not reached the same level of success in other parts of the globe.

Also, economists have mixed feelings when it comes to micro-transactions. Some think they bring a source of confusion for users, whereas other hold them in high esteem as the future of online business models.

Another drawback are the high transaction costs involved which can approximately account for 7% of the purchase price. One way to lower transaction costs is to follow the iTunes strategy: aggregate purchases up to a set amount or time period for potentially higher average price.

However, for digital sales with very high margins, the micro-transaction model still remains viable.

Benefits and issues of the micro-transaction business model:

Major advantages:

-Low cost barrier for purchases-Free additional content after launch-It can support a game that you play for free-Buy-in from customers who cannot afford regular subscription-Customers can purchase content whenever they can or want to

Major disadvantages:

-Low margins since the majority of users do not pay-High transaction costs potentially limiting profits-Lack of customer loyalty which can lead to lower revenue levels

For content monetization using this model the most important metrics are ARPU (Average Revenue Per User) and ARPPU (Average Revenue Per Paying User). The former measures the average revenue for an individual user compared to all the users of the service or product, while the latter measures the average revenue for an individual user as opposed to all paying users of the service or product.

Two other things worth considering when it comes to the micro-transaction business model are the pricing and customer retention part.

Figuring out the correct pricing requires a lot of effort. Digital assets are frequently undervalued; however, they can significantly boost revenue with careful price testing.

To boost retention, premium subscription offer is always a viable option that grants not only credit but also additional content or features. Such an offer often generates smaller but predictable revenue that complements sales of digital assets.

The micro-transactions business model has been proven as very successful in the past and it will likely continue to be successful in the next few years, as companies seem to be predominantly developing games with this model in mind and mobile gaming is continuing its fast growth.

Overall, micro-transactions can work very well as a business model, as long as companies keep in mind their customers are their number one priority and must enjoy spending money on them, with the profit taking a background position.

Bear with us for the second part of this article where we’ll be analyzing the best practice tips for the Subscription Business Model.

In our attempt to analyze the key terms that define content monetization we are offering insights into the two major content monetization models: micro-transactions and subscriptions.

A lot of producers whose aim is to protect and monetize their digital content ask themselves which model is better to maximize their revenue and increase their subscription base.

Most of them love to implement a subscription model, especially one with a sticky online community component. This allows building long-term, profitable relationship with their subscribers – which seems to be the perfect solution to the era of low attention span and digital disruption.

The Subscription Business Model

As a popular model for online content purchases, subscriptions stand to play an increasingly important role in our lives as more and more companies embrace content distribution over the Internet.

The offers already range from simple content monetization in a form of a content protection to more serious user management on platforms that offer a large number of users who are there for one reason: to buy premium digital content.

Every subscription business model is based on the same premise of a supplier making a regular charge for a product or services offered. Digital subscriptions are tied to services without exchange of physical products and the entire account is managed online allowing the company to manage it as a service.

The differences come according to a predefined cost and schedule, and the time frequencies over which subscriptions are paid.

For instance, a provider may offer a freemium service whereby people can access a certain level of content free of charge, or choose to pay a subscription for premium content, and one provider may charge subscriptions on a monthly basis, whereas another may charge six-monthly.

Major disadvantages:

-Potential subscription overload could reduce product opt-out;-If not automated account management can be a burden;-Higher cost barrier;-Potential loss of revenue from dedicated gamers who would purchase a large amount of content;-Consumers may get annoyed if they end up regularly paying for a service they stopped using;

All subscription models share the same key metrics – ACLV and MRR. The most vital metrics for the subscription business model are the Average Customer Lifetime Value (ACLV) and the Monthly Recurring Revenue (MRR).

The ACLV is the result of the average customer payments and the duration of the amount charged on a recurring basis. The average customer lifetime value is the average amount of revenue a company can get from each and every customer.

To calculate ACLV, you need to multiply the average customer duration with the monthly charge rate. Once the ACLV has been determined, it’s a good practice to be compared to the average cost spent on acquiring new customers.

The MRR, on the other hand, is the amount of revenue likely to be obtained monthly, based on customer subscription rates and behaviours. The MMR should be relatively stable if you employ the subscription model. It is as important metric as ACLV for any subscription business. It’s in fact what makes this business model so great and booming.

Acquiring a new customer means getting a recurring revenue, which means you don’t have to worry about one-off content monetization every month. It’s quite different from traditional sales, however, it gives new challenges such as customer retention and churn.

Factors for successful subscription business model:

1. Automated operations – whenever possible, try and automate your operations to manage the logistics of customer accounts, billing plans (product, price and billing frequency, which can grow exponentially as revenues scale). Manually performing these tasks is not scalable and can be tedious, error-prone and overwhelming.

2. Understandable customer terms and conditions – enable easy communication that ensures the customer terms and conditions clearly explain the purchase details and cancellation options. Include the contact information for customer support as a guarantee for customer retention.

3. Value proposition – with a subscription business, value proposition is critical to the success of a company. Your customers must feel they are receiving more than they are paying for the value of your product or service.

4. Easy payment options – make the payment options as easy as possible. This goes for any additional actions that require more steps from your customers to enable recurring billing. These additional options, more often than not, result in lower conversion rates.

To sum up, a subscription business must always be challenging itself. It must work to deliver a better product, but it must also innovate its business practices. Things that worked yesterday will not necessarily work with as much efficiency tomorrow.

It is not set in stone that the subscription business model, the way SaaS companies use it nowadays, cannot evolve. Only one thing should remain certain: customers who can easily see the value behind your product and ultimately remain loyal.